M t. 
 
 2236 
 
 V/5 
 
 UC-NRLF 
 
LETTER TO THE RAILROAD 
 SECURITIES COMMISSION 
 
 IN REPLY TO THEIR REQUEST FOR 
 INFORMATION AND OPINIONS UPON 
 QUESTIONS PERTAINING TO THE 
 
 Issuance of Stocks and Bonds 
 
 OF 
 
 American Railways 
 
 BY 
 
 W. H. WILLIAMS 
 
 THIRD VICE-PRESIDENT OF 
 
 THE DELAWARE AND HUDSON COMPANY 
 
 NEW YORK, JANUARY 18, 1911 
 
THE DELAWARE AND HUDSON COMPANY, 
 
 OFFICE OF 
 THE THIRD VICE-PRESIDENT, 
 
 32 Nassau Street, New York, N. Y. 
 
 JANUARY 18, 1911. 
 
 RAILROAD SECURITIES COMMISSION, 
 Senate Office Building, 
 
 Washington, D. C. 
 
 Gentlemen : 
 
 In accordance with your letter of the 22nd ulto., 
 there are submitted herewith my views upon 
 " questions pertaining to the issuance of stocks 
 and bonds," by American railroads. 
 
 FIRST. 
 
 (a) " ADVISABILITY OF LIMITING THE ISSU- 
 
 ANCE OF CAPITAL STOCK AT PAR FOR MONEY 
 OR PROPERTY OF THE ACTUAL VALUE OF THE 
 PAR OF THE STOCK ISSUED. 
 
 (b) THE SALE OF BONDS AT A DISCOUNT. 
 
 (c) THE SALE OF NEW STOCK AT PAR TO 
 STOCKHOLDERS WHEN THE OLD STOCK WAS 
 SELLING ABOVE PAR IN THE MARKET. 
 
 (d) THE CAPITALIZATION OF BETTER- 
 MENTS, ADDITIONS AND EXTENSIONS 
 CHARGED IN THE PAST TO INCOME, BUT 
 WHICH MIGHT HAVE BEEN CHARGED TO 
 CAPITAL. 
 
 M252359 
 
(<?) THE SUGGESTION OF THE QUESTION 
 OF THE MODE OF VALUATION OF THE PHYSI- 
 CAL AND NON-PHYSICAL PROPERTY OF RAIL- 
 ROADS IN EVENT THE VALUATION OF THE 
 PROPERTY OF A RAILROAD IS MADE A BASIS 
 OF CAPITALIZATION." 
 
 All of these questions are more or less 
 dependent upon the determination of the rela- 
 tion, if any, existing between 
 
 (1) the cost price of material in place, 
 
 (2) the par value of securities issued and 
 
 outstanding, and 
 
 (3) the present value (sometimes called 
 
 "fair value") of the property. 
 
 The original cost of material in place on any 
 one railway, must be a definite sum although it is 
 seldom ascertainable with accuracy. While the 
 aggregate cost may increase or decrease as ma- 
 terial is added or withdrawn, the original cost of 
 any quantity or unit of material in place is per- 
 manent. It does not follow, however, that the 
 original cost of material in place represents the 
 cost to the present owners of the property. 
 They may have purchased the property from 
 another company, and paid either more or less 
 than the cost of material in place. The price 
 paid in such a case is the resultant of many con- 
 ditions, including the necessities of the seller 
 and the respective estimates of the value to 
 
themselves of the property made by both parties 
 to the transaction ; but the original cost can 
 never be one of the controlling conditions. 
 There are few existing railway companies (and 
 these only the smaller ones) that do not rep- 
 resent reorganizations following receiverships, or 
 to a large extent the purchases of properties of 
 other companies and their subsequent merger 
 or consolidation with the purchasing company. 
 In view of these facts it is plain that there is no 
 fixed necessary or common relation between the 
 " cost of material in place " and the " cost of the 
 property to the present holders thereof." 
 
 The aggregate par value of securities is con- 
 trolled by (a) the " cost of the property to the 
 present holders thereof," and (b) by the rate at 
 which they will be accepted in payment therefor 
 by the sellers, or at which they can be sold for the 
 cash needed to pay the purchase price. It may 
 be concluded, therefore, that there is not, nor can 
 there be, any definite and fixed relation between 
 any two of the three items. 
 
 Property without the right of use has no value. 
 Value begins with use and increases as use 
 increases.. It is dependent upon the right of 
 use, and is controlled by the extent of use. The 
 value of a railway, therefore, is not constant, 
 and may be subject to frequent and to violent 
 fluctuations. 
 
The present value of the property is its value 
 in use and so cannot be fixed by the aggregate 
 par value of securities issued and outstanding, 
 or by the original cost of material in place, nor 
 would the fact be otherwise were stock and 
 bonds to be issued at par (with neither a discount 
 nor a premium) and were all additions and bet- 
 terments and all extensions paid for by the 
 issue at par of capital securities. The par value 
 of securities issued is the consequence of past 
 transactions and so cannot be controlled by so tem- 
 porary and fluctuating a fact as " present value," 
 but these transactions are too remote from orig- 
 inal cost to have been controlled thereby and 
 " the cost price of material in place " being ante- 
 cedent to both of the other facts could, of course, 
 be controlled by neither. The suggestion that 
 value in use can be increased or diminished by 
 issuing or declining to issue new securities in 
 any amount needs only to be stated in order that 
 its absurdity shall be recognized. 
 
 Unfortunately economic terminology, not al- 
 ways evolved in the light of intimate association 
 with the facts, has seemed to make " capitaliza- 
 tion " synonymous with par value of " capital 
 securities issued." But in ordinary practice, and 
 in fact, there is a distinction of which it is im- 
 portant to take full cognizance. Capitalization 
 is the amount at which the property is carried 
 
on the books ; that is, in the capital account. 
 It may be said to include all of the assets. The 
 property may be paid for by the issue of secur- 
 ities either at par, at a discount, or at a premium, 
 also by the reinvestment of the net income. 
 For illustration, if (x) $1,000,000 par value of 
 capital securities be sold at a premium of 50 per 
 cent, there would be realized (y) $1,500,000 cash; 
 in which case the "Capitalization" would be 
 $1,500,000, while the " Capital Securities " out- 
 standing would be $1,000,000. If subsequently 
 additional property aggregating (2) $500,000 be 
 paid out of earnings or income and not capitalized, 
 we would have as , 
 
 (x) Capital securities (or Capi- 
 tal Liabilities) $1,000,000 
 
 (y) Capitalization (book cost 
 
 of property) 1,500,000 
 
 (2) Cost of property to present 
 
 holders. 2,000,000 
 
 In the case of a premium on securities there 
 is an excess of " Capitalization " over " capital 
 securities"; and in the case of property paid 
 for out of earnings or income there is an ex- 
 cess of "cost of material in place" over both 
 "capitalization" and "capital securities" which 
 would not commonly be revealed by a superficial 
 examination of the accounts. Confusion of these 
 terms has caused much misunderstanding of rail- 
 
way questions. The difficulty can be largely 
 overcome by assuming, for the moment, that the 
 ownership of the railway rests with a "joint 
 partnership, " and not with a " stock corporation." 
 No one would attempt to say that a one-twentieth 
 interest in a joint partnership is worth no more 
 and no less than the investment at the time the 
 partnership was formed. The same is true of a 
 stock corporation, and the par value of the 
 capital securities does no more than put in 
 recognized form the agreement among the 
 owners of all securities, and of different grades 
 of securities, as to the terms on which they will 
 share the losses or profits of the undertaking. 
 
 Just as a man may own a " limited " or "special" 
 partnership in a firm, so may his interest in a 
 stock corporation be one of several limited or spe- 
 cial classes. Some limited partnerships provide 
 for a fixed or limited annual return with no active 
 voice in the actual management of the firm, and 
 as representing this class we have the bond- 
 holders of the railway. As the other partners 
 assume the greater and more immediate risks of 
 losses and receive all profits above the annual 
 amount paid to the limited partnerships, so in 
 like manner the stockholders assume the more 
 imminent risks of losses and receive all profits 
 represented by the excess of earnings on capital 
 over the interest on bonds, including any excess 
 
of earnings on improvements paid for from the 
 proceeds from sale of bonds over and above the 
 interest on the said bonds. 
 
 Stated in another way, the book assets (or capi- 
 talization) of a corporation represent property; 
 the liabilities (including securities) denote the 
 ownership and relative equities of the several 
 classes of owners. 
 
 The question whether new capital shall be 
 raised through the issue of stock or of bonds is 
 largely dependent upon general market condi- 
 tions and the credit of the company. Formerly, 
 our life insurance companies could purchase 
 stocks, but the present insurance laws of New 
 York prohibit the ownership of stocks. This 
 has resulted in a material reduction in a special 
 market formerly existing for railroad securities, 
 and has caused the sale in a smaller market of 
 not only the new issues of stocks but also some 
 of old issues held by the insurance companies. 
 This undoubtedly resulted in increasing the 
 issue of bonds and decreasing the issue of 
 stocks. Whether the market will adjust itself 
 to the new conditions sufficiently to permit of a 
 greater proportion of new work being financed 
 through issue of stocks instead of bonds is yet 
 to be determined. 
 
 American railways must satisfy their capital 
 requirements through appeals to either European 
 
or domestic investors. The dominant factor in 
 the domestic investment market for railway 
 securities is the investment demand of savings 
 banks, 6o and' life insurance companies and 
 those controlling trust funds. This demand is, 
 in a very large extent, regulated by statutes, and 
 this sort of legislative regulation has a direct 
 and very marked effect upon the methods of 
 corporate financing adopted by railway com- 
 panies. For example, the statutes of New York 
 and Massachusetts permit investments by the 
 institutions and trustees in securities of railways 
 but not of industrial corporations. These inves- 
 tors cannot, however, purchase all classes of rail- 
 way securities, even though issued by companies 
 of exceptionally high credit, nor can they pur- 
 chase any class of securities of those companies 
 whose financial situation does not meet the 
 requirements of the law. Collateral and income 
 bonds c^inot be purchased ; the gross earnings 
 of the companies whose securities can be pur- 
 chased must not be less than five times the interest 
 and rentals, and generally the companies must 
 have paid the interest on their bonds and dividends 
 of not less than four per cent, per annum on capital 
 stock of a par value of not less than one-third of 
 the par value of bonds outstanding, and for New 
 York State such interest and dividends must 
 have been paid for not less than the preceding 
 
five consecutive years, and in Massachusetts for 
 not less than the preceding ten consecutive years. 
 Similar statutory regulations exist in Connec- 
 ticut and New Jersey and probably elsewhere. 
 A very large proportion of the bonds of the 
 railroads is owned by this class of investors. 
 
 The direct influence on the methods of financ- 
 ing adopted by the railways attributable to this 
 sort of regulation, although somewhat less exten- 
 sive in degrees, is precisely similar to the influence 
 upon the market for United States bonds of the 
 laws governing the note issues (circulation) of 
 National banks. Although the railway securities 
 admitted to this special investment market can 
 also be sold in every other market, in competi- 
 tion with other securities not admitted to the re- 
 stricted market, access to the restricted market is 
 a privilege having such distinct value that no 
 railway which is in a position to meet the require- 
 ments can afford to neglect to satisfy them. 
 
 The fact that a security does satisfy the 
 rigorous requirements of these statutes also 
 tends strongly to broaden its market among 
 the considerable class of investors who might 
 lawfully purchase other securities but whose 
 conservative management of their investments 
 leads them to give the preference to what are 
 commonly known as "savings bank" securities. 
 In other words, many investors whose purchases, 
 
10 
 
 unlike those of savings banks, insurance com- 
 panies and trustees, are not restricted by statutes, 
 voluntarily subject themselves to about the same 
 restrictions. 
 
 In a similar manner the investment market 
 is affected by the rules of the great Ex- 
 changes in which bonds and shares are bought 
 and sold and the more or less self-imposed re- 
 strictions of the principal banking institutions. 
 Bankers readily loan their funds on collateral, 
 consisting of securities listed on the New York 
 Stock Exchange, while some refuse to loan on 
 other collateral, and all refuse to do so until 
 some investigation can be made of the financial 
 status of the company issuing the securities, so 
 that the listing of securities on the New York 
 Stock Exchange may be said favorably to affect 
 their market value. In like manner the listing 
 on the London Exchange or the Paris Bourse 
 tends to broaden the market for securities. 
 
 Some of the states now exercise supervision 
 over issues of capital securities of railway com- 
 panies but it can be said, without fear of any 
 well founded contradiction, that it is not their 
 favorable action which secures an " investment" 
 market for the securities, but compliance with 
 the statutory regulations of the investments of 
 the funds of savings banks, trustees, fire and 
 life insurance companies, etc. In fact securities 
 
II 
 
 available to such purchasers constitute all the 
 railway securities commonly known as " invest- 
 ment securities ", while other securities issued 
 by these same companies which fail to meet the 
 statutory requirements only by reason of the 
 " class " of the securities (for example, collateral 
 trust bonds) form the semi-investment class. All 
 other railway securities may be said to be more 
 or less " speculative ". 
 
 With these preliminary remarks, the five 
 matters suggested by the Commission will now 
 be separately treated. 
 
 (a) THE SALE OF SHARES AT LESS THAN PAR, 
 WHEN NECESSARY, OUGHT NOT TO BE 
 PROHIBITED. 
 
 Inasmuch as capital securities bear no fixed 
 relation to value in use, or the "fair value " of 
 the property, and can in no conceivable way 
 control or affect such value, the security holders 
 of a corporation are the only ones directly inter- 
 ested in the volume or in the price at which 
 additional securities are sold. These are ques- 
 tions to be determined by the present owners (or 
 partners) and the new partners they have invited 
 to join them ; and the Government should do no 
 more than to see that the facts are not intention- 
 ally or wrongfully misrepresented. This is now 
 secured, so far as railroad securities are con- 
 cerned, through a uniform system of accounts 
 
12 
 
 and the publicity given to the results of opera- 
 tions through the annual, monthly and special 
 reports to the Interstate Commerce Commission, 
 as well as by the periodical inspection by the 
 examiners of the Commission of the accounts of 
 the carriers. 
 
 With the exception of the very small railways 
 which are financed in the local communities they 
 serve, it is undoubtedly true that the stock of a 
 railway cannot be sold at par or better unless its 
 securities meet requirements of the savings 
 bank and insurance laws of New York and 
 Massachusetts and are listed on the New York 
 Stock Exchange. Therefore, to say that stock 
 must not be issued at less than par is to say 
 that where the credit of a company is impaired 
 it cannot admit new general partners into the 
 enterprise, but must raise the needed additional 
 capital by the issue of bonds or notes carrying 
 annual interest charges ; even though these 
 additional fixed charges cause a further impair- 
 ment of the credit of the company, thus render- 
 ing even more difficult any future financing, as 
 well as the rendering of satisfactory service and 
 the payment of fair wages to employees. 
 
 Having in mind what has been said above re- 
 garding the parties who are directly interested in 
 the securities outstanding, there would appear to 
 be no reasonable objection to the issue of stock 
 
13 
 
 at less than par, provided it be not unfair to the 
 existing stockholders in other words, that the 
 old and the new stockholders be placed on an 
 equal footing, and generally new stock must be 
 offered pro rata to the existing stockholders. 
 
 To say that capital stock must be issued " at 
 par for money or property of the actual value of 
 the par of the stock issued " is to differentiate as 
 between the methods under which the capital is 
 secured. 
 
 For example, Road "A" can build Road "B" 
 for $1,000,000, but the capital stock of Road "A" 
 to-day can be sold at only $90 per share having 
 a par value of $100, thus requiring the issuance 
 of capital stock of Road " A " of an aggregate 
 par value of$i,iii,m. Unless sale of stock at 
 a discount be permitted, Road U A" could not 
 build Road " B " and finance it by the issue of 
 additional capital stock of Road u A." 
 
 However, if others build Road "B", and the 
 traffic handled over it as well as the traffic it could 
 have routed via Road " A " would increase the 
 net operating income of the two roads sufficient 
 to earn say 9 per cent, on the cost of Road " B ", 
 the value to Road " A " of Road u B " would be 
 greater than the original cost of Road " B " and 
 sufficient to pay 6 per cent, on $1,500,000. In 
 other words, to say that stock must be issued 
 at par would be equivalent to saying that 
 
14 
 
 Road "A" could not issue $i,iii,m par 
 value of its capital stock to build a road costing 
 $1,000,000 and securing to Road " A J> an 
 increase in its net operating income equiva- 
 lent to 9 per cent, on said $1,000,000, cost of 
 material in place, or 8.1 per cent, on $i,iii,m 
 par value of securities sold for $1,000,000 cash; 
 but that after the building of the road by others 
 Road "A" could then issue $1,500,000 par value 
 of its capital stock to buy the new road if it had 
 that value. 
 
 The alternative would be to issue bonds at a 
 discount, but all the bonds authorized under 
 existing mortgages may have been issued, neces- 
 sitating the issue of a junior (or inferior) bond 
 which could not be marketed to advantage ; or 
 it may be that to issue additional bonds would 
 cause the total amount outstanding to be in 
 excess of the percentage of bonds to capital stock 
 outstanding permitted by the savings bank laws 
 previously mentioned. 
 
 (b) THE SALE OF BONDS AT A DISCOUNT WHEN 
 NECESSARY OUGHT NOT TO BE PROHIBITED. 
 
 Bonds are sold under terms and conditions of 
 the mortgage securing them. The mortgages of 
 recent date mature in twenty-five to fifty years 
 from the date of their execution, and any future 
 issues of bonds secured by such mortgages must 
 
15 
 
 be under the terms and conditions set forth in 
 the mortgages. Among other things, the rate 
 of interest is mentioned and the maximum 
 rate is fixed. Therefore, the question whether 
 the bonds can be sold at par or better will 
 depend upon the state of the market, the con- 
 ditions of the investment, and the credit of the 
 company. If buyers at par cannot be obtained, 
 a lower price must be accepted or the money 
 provided in some other way, or the improvements 
 needed to render satisfactory service and operate 
 the property economically will be seriously 
 retarded. This is especially true in times 
 like the present, when there is no market for 
 new issues of stock and only a very limited 
 market for new issues of bonds. 
 
 Those objecting to the sale of bonds at a 
 discount, who claim that instead of selling a 
 4^ per cent, bond at 90, the company should 
 sell a 5 per cent, bond at 100 (par), can have 
 had no financial experience, and are not fully 
 competent to pass judgment on this question. 
 From personal experience, the writer knows 
 that a 5 per cent, bond cannot be sold at par 
 when a 4^2 per cent, bond of the same company 
 can be sold at 90. The 5 per cent, bond could 
 not be sold for more than 97 or 98. The ques- 
 tion of yield is the principal consideration with 
 the investor and he is not so dull of comprehen- 
 
i6 
 
 sion as to be unaware that when he obtains a 
 promise to pay $1,000 for $900 he has some- 
 thing very substantial to add to the annual 
 interest payments. Nor do the financial managers 
 of the companies overlook the fact that a charge 
 equal to that necessary to provide a sinking 
 fund, equivalent at the end of the period when the 
 bonds mature to the amount of the discount, is a 
 necessary addition to the annual interest charges 
 before the true cost of the loan can be ascertained. 
 The present instructions of the Interstate 
 Commerce Commission permit of the capitaliza- 
 tion of banker's commission if paid in the form 
 of a commission, but do not permit capitalization 
 of commissions paid in the form of discount. In 
 other words, bonds can be sold at par and a 
 discount of two or three per cent, paid the 
 banker for their sale, thus netting the company 
 only ninety-seven or ninety-eight per cent., and 
 the commission charged to capital account. On 
 the other hand, the Commission's instructions 
 forbid the capitalization of this commission when 
 paid in the form of a discount and the bonds are 
 actually sold at ninety-seven or ninety-eight 
 per cent, of their value. Thus it is the method 
 and not the result that is affected. The out- 
 right sale of the securities at a discount is better 
 from the standpoint of protecting the credit of the 
 company than their sale at its risk through pay- 
 
17 
 
 inent of a fixed commission. In the latter case 
 the company receives payment for the securities 
 only as they are sold, though its financial needs 
 may make immediate availability of the funds 
 realized most necessary or desirable, and although 
 this result could be secured only through out- 
 right sale. 
 
 The amount of the discount must be commen- 
 surate with the risk and depends upon the 
 market in which the securities are sold. On 
 high grade securities the allowance to the 
 bankers financing security issues in New 
 York ranges from two to three per cent. ; 
 in London it is six per cent., and in Paris ap- 
 proximately ten per cent. Few, if any, American 
 railways have important banking connections 
 in either London or Paris. Therefore sales in 
 those markets must be arranged through New 
 York banking houses, necessitating the payments 
 of commissions to the New York bankers as well 
 as to the London or Paris bankers. In addition, 
 there must be paid the cost of listing the securities 
 on the London Exchange or the Paris Bourse, the 
 English or French tax and other charges which 
 the laws of those countries require to be paid 
 before securities are offered for sale. Whether 
 securities shall be marketed through New York, 
 London or Paris depends upon the financial con- 
 dition in these markets, etc. 
 
i8 
 
 Bankers are constantly in touch with the in- 
 vesting public, while the railroads are not, as the 
 sales of securities by any one Company occur 
 only at infrequent intervals. Therefore the net 
 amount received from sales handled by bankers 
 is more than is likely to be had if the railroad 
 attempt to sell direct. Furthermore, the banker 
 guarantees the success of the undertaking by tak- 
 ing all securities not sold to others, while a failure 
 to place the securities might seriously impair 
 the credit of the company, so that the successful 
 outcome of the undertaking is essential to the 
 future development of the road and the financing 
 of the cost. 
 
 (c) IT IS NOT IMPROPER TO SELL STOCK TO 
 STOCKHOLDERS AT PAR WHEN THE MAR- 
 KET QUOTATIONS ARE HIGHER. 
 
 The quotations representing actual sales and 
 purchases of active securities, handled in large 
 quantities, in a principal market such as the New 
 York Stock Exchange, or, under normal condi- 
 tions, are of considerable significance as indicating 
 the real value of those portions of the total issues 
 which are, in common parlance, "on the Ex- 
 change," that is to say of the large or small 
 blocks of shares or bonds which are currently in 
 the hands of brokers or others to be sold and 
 bought as the hourly and daily fluctuations may 
 seem to afford opportunity for profit. In the 
 
19 
 
 case of nearly every railway, if not in that of all 
 railways, the proportion of any of its issues that 
 is thus "on the Exchange" is relatively small. 
 Experience has repeatedly and abundantly dem- 
 onstrated that when pressure to sell or to buy 
 extends beyond the limited volume of this cur- 
 rent supply the previously existing quotations 
 afford little indication of the prices at which the 
 larger quantity can be marketed or purchased. 
 When new shares of stock are issued to satisfy 
 capital requirements these requirements are 
 usually immediate and pressing, and so exten- 
 sive in amount that the sale of the new 
 stock upon the market if not impracticable 
 entirely, would at least depress the price to an 
 extent which it would be simply impossible to 
 estimate in advance. In other words, the current 
 quotations based upon the small value of the 
 existing issue actually available for stock 
 exchange dealings affords no indication of the 
 price which could be obtained were the whole 
 new issue thrown upon the market. Certainly 
 no one would suggest that under these circum- 
 stances the railway company should undertake 
 the difficult and doubtful task of market manipu- 
 lation, involving purchases as well as sales, 
 sometimes resorted to by other interests (and 
 not always with success) in order to "feed out" 
 to the market, little by little, a large block of 
 
20 
 
 securities which could not be satisfactorily sold 
 on a normal or natural market. An offer to 
 shareholders to sell to them at par or at 
 least at some figure below the current quota- 
 tions, new shares in a stated proportion to those 
 they already hold is, under such conditions, 
 merely a proper and natural expedient to obtain 
 the new capital in an orderly and effective way 
 and to obtain for the new issue the highest 
 reasonable price which market conditions justify. 
 The price thus obtained is often and probably 
 in most instances considerably higher than would 
 be secured if the whole issue were submitted to 
 the action of the Exchange. Two great railway 
 companies that had for some time paid regular 
 dividends of six per cent., or more, on their 
 shares which had not been quoted as low as par 
 for many years, recently tried unsuccessfully 
 to sell new issues to their shareholders at a 
 premium, though below the then current quota- 
 tions, and were finally obliged, in order to obtain 
 new capital that they could not do without, to 
 sell at par the new issues to their shareholders. 
 
 The writer already has expressed the opinion 
 that "the security holders of a corporation are 
 the only ones directly interested in the price 
 at which additional securities are sold." The 
 stockholders' relative interest in the property 
 as between themselves is neither increased 
 nor decreased by the issue to themselves 
 
21 
 
 of additional stock, whether below par, at par, 
 or above par the only resulting changes being 
 in the fractional ownership of the whole repre- 
 sented by the certificates, each having a nominal 
 par value of $100. Again, for illustration, 
 assume the ownership to rest with a joint 
 partnership consisting of ten partners investing 
 $100,000 each, or a total of $1,000,000, that 
 the present market value of the whole as a 
 going concern is $[,500,000, and that $500,000 
 additional is to be put into the enterprise, bring- 
 ing the total up to $2,000,000. It matters not 
 whether the $500,000 be raised by each partner 
 investing an additional $50,000 and continuing 
 to own a one-tenth, or four-fortieths interest, or 
 whether the money be raised by the sale of a 
 one-fourth interest to new partners, each of 
 the original partners retaining only a three- 
 fortieths interest, or, to arrive at the same result, 
 each partner can invest an additional $50,000 
 and subsequently they can each sell to others a 
 one-fourth interest. Whichever way it is done, 
 the persons investing the additional $500,000 
 will be entitled to a one-fourth interest in the 
 property, that is, the fractional ownership will 
 have for the denominator the value of the prop- 
 erty plus the new capital invested, and not the 
 original capital invested plus the new capital 
 invested; and for an original investment equiv- 
 
22 
 
 alent to one-half of the new value, the original 
 partners still secure a three-fourths ownership. 
 Each of the original partners can subsequently 
 sell another quarter interest, retaining the money 
 personally, and then have an interest in the 
 property with a market value equivalent to the 
 original investment, and with a cash profit for 
 his personal use of $50,000. 
 
 The result is identical with a stock corpora- 
 tion the individual ownership instead of being 
 expressed in fractions being stated as shares at a 
 nominal par value of $100 each. In a company 
 with outstanding capital stock of $1,000,000 each 
 holder of one share of stock owns TTRRRJ of the 
 property. 
 
 A wrong can be done only by the sale to others 
 than the stockholders of new stock at less than 
 its real market value. However, as the capital 
 stock cannot be increased without the consent of 
 the stockholders (usually by a two-thirds vote), 
 and since new stock must be first offered to the 
 existing stockholders, their interests appear to 
 be amply protected. 
 
 Stockholders are constitutionally entitled to 
 not less than a fair return upon the value of the 
 property, provided the rates are reasonable in 
 view of the service. In other words, they are the 
 owners of the whole property as a going concern 
 (not merely of the material in place with no right 
 
23 
 
 of use) and as the use increases so does the value 
 of their ownership increase. No portion of such 
 ownership can be taken from them legally without 
 payment for its market value. 
 
 The possibility of increased dividends from 
 time to time gives to such stock a speculative 
 value not enjoyed by bonds having a fixed rate 
 of return and no participation in the profits. It 
 is this " speculative " value which at times causes 
 the market prices of securities of several cor- 
 porations to be so at variance with the yields on 
 the respective securities. 
 
 A study of the factors governing value will 
 fully confirm the rights of the stockholder to any 
 and all profits, viz. : 
 
 1. The equities between different classes of 
 security holders are so arranged that almost 
 the whole risk of loss is borne by the stock- 
 holders, who are also charged with the 
 burdens of management. Are not those 
 who bear the risks entitled to the profits ? 
 
 2. The reinvestment in the property of a 
 portion or all of the net income is at the 
 expense of the stockholders, and increases 
 the value of the property. 
 
 3 . The previous sale of securities at a premium 
 tends to cause the market price to exceed the 
 par value of securities outstanding. 
 
24 
 
 4. Increments earned and unearned, being 
 the enhancement of values due to the collec- 
 tive energies of two or more persons or 
 communities, over and above the value due 
 to the individual efforts of each, are the 
 rewards of risks assumed. 
 
 Such increments are those that character- 
 ize the steady upward movement in prices of 
 well-located real estate. Remove a man's 
 neighbors and the value of his property is 
 reduced, though no change in design, 
 material or use of his property has been 
 made. 
 
 This increment is unearned wholly, or in 
 part, only when the proprietor has not 
 contributed his full share to the development 
 of the community. 
 
 A study of values prior and subsequent to 
 the construction of a railway will disclose 
 the fact that every railway does its full share 
 in the development of the communities it 
 serves, and such increments are fully earned. 
 
 5. Profits from leases and operation of proper- 
 ties not owned. 
 
 6. Compensation for additional risk due to 
 guaranteeing to "limited" partners (bond- 
 holders) stipulated annual returns. 
 
 For illustration : There are two railroads, 
 each costing $200,000,000 and each having 
 net income from operations equivalent to 
 $9,000,000 per year. Road "A" however, is 
 financed through the issue of $100,000,000 
 
25 
 
 par value of 4 per cent, mortgage bonds and 
 $100,000,000 par value of capital stock ; while 
 Road "B" is financed through the issue of 
 $200,000,000 of capital stock. 
 
 Road "A" after paying $4,000,000 in- 
 terest on its mortgage bonds, will have 
 $5,000,000 available for dividends, or 5 per 
 cent, on its $100,000,000 outstanding capital 
 stock ; while Road " B," not having any in- 
 terest to pay, will have $9,000,000 available 
 for dividends, or only 4^ per cent, on its out- 
 standing $200,000,000 of capital stock. 
 Interest must be paid whether or not it is 
 earned ; but there are no statutory require- 
 ments that dividends must be paid when 
 earned, only that they cannot be paid unless 
 they are earned. 
 
 Had the net operating income of the Roads 
 "A" and "B" been each $4,000,000, Road 
 U A" would have had no money available 
 for dividends, while Road "B" would have 
 earned 2 per cent, on its outstanding capital 
 stock. 
 
 (a) While every one knows this, it 
 seems well to show this in complete form 
 as is done in the following table, which 
 assumes that the total property account 
 (capitalization) amounts to $100,000,000, 
 and shows how a return of 6 per cent, on 
 that property, or $6,000,000, would be ap- 
 portioned between Bonds and Stock, with 
 Bonds say at 4 per cent., when the Bonds 
 
26 
 
 and Stock have varying relations to each 
 other : 
 
 Say total property, $100,000,000 earns 
 6 per cent, or $6,000,000 per annum. 
 
 4% Bonds. 
 
 Interest on 
 Bonds. 
 
 Stock. 
 
 Balance 
 Available for 
 Dividends. 
 
 %on 
 Stock. 
 
 10 % of Property 
 
 $4OO,OOO 
 
 90% of Property 
 
 $5,600,000 
 
 6.22 
 
 20% 
 
 
 
 8oo,OOO 
 
 80% " 
 
 
 5,2OO,OOO 
 
 6.50 
 
 30% 
 
 
 
 I,2OO,OOO 
 
 70% " 
 
 
 4,800,000 
 
 6.86 
 
 W% 
 
 
 
 I,6oo,OOO 
 
 60% ' 
 
 
 4,400,000 
 
 7-33 
 
 50% 
 
 
 
 2,OOO,OOO 
 
 50% ' 
 
 
 4,OOO,COO 
 
 8.00 
 
 60 % 
 
 
 
 2,4OO,OOO 
 
 40^ ' 
 
 
 3,6oo,OOO 
 
 9.00 
 
 10% 
 
 
 
 2,800,000 
 
 30% ' 
 
 
 3,200,000 
 
 10.66 
 
 80% 
 
 
 
 3,2CO,OOO 
 
 20% ' 
 
 
 2,8oo,OOO 
 
 14.00 
 
 90* 
 
 
 
 3,600,000 
 
 10% " 
 
 
 2,4OO,OOO 
 
 24.00 
 
 (b) Assuming, however, a portion of 
 the earnings be reinvested in the property, 
 annually, until they aggregate $50,000,000. 
 Then we have : 
 
 Total property, $150,000,000, 
 Stocks and bonds, $100,000,000, 
 
 At 6 per cent, on total property, return 
 would be $9,000,000 per annum. 
 
 4% Bonds. 
 
 Interest on 
 Bonds. 
 
 Stock. 
 
 Balance 
 Available for 
 Dividends. 
 
 %on 
 Stock. 
 
 \o% of Securities 
 
 $4OO,OOO 
 
 90% of Securities 
 
 $8,6oo,000 
 
 9.56 
 
 20% ' 
 
 
 
 8oo,OOO 
 
 80% " 
 
 
 8,2OO,OOO 
 
 10.25 
 
 30% ' 
 
 
 
 1,200,000 
 
 70% " 
 
 
 7,800,000 
 
 11.14 
 
 40% ' 
 
 
 
 1,600,000 
 
 60 % " 
 
 
 7,4OO,OOO 
 
 12.33 
 
 50% ' 
 
 
 
 2,OOO,OOO 
 
 50% " 
 
 
 7,000,000 
 
 14.00 
 
 60% ' 
 
 
 
 2,4OO,OOO 
 
 40% " 
 
 
 6,600,000 
 
 16.50 
 
 10% ' 
 
 
 
 2,8oo,OOO 
 
 30^ " 
 
 
 6,200,000 
 
 20.67 
 
 80% ' 
 
 
 
 3,200,000 
 
 20# " 
 
 
 5,800,000 
 
 29.00 
 
 90'% < 
 
 
 
 3,600,000 
 
 10% " 
 
 
 5,400,000 
 
 54-00 
 
 (c) The proportion of the cost paid for 
 by the sale of bonds at par has been 
 
2 7 
 
 extended in the above tables to 90 per 
 cent, of the total cost of property, while 
 naturally such proportion of value could 
 not command a bond at 4 per cent. 
 
 7. Capitalization of "fair return" during 
 the years in which no return was made to 
 the security holders. 
 
 On this point the Railroad Commission of 
 Wisconsin has spoken wisely and clearly. 
 
 In Hill vs. Antigo Water Company, decided 
 on August 3, 1909, that body said : 
 
 " But new plants are seldom paying at 
 the start. Several years are usually required 
 before they obtain a sufficient amount of 
 business or earnings to cover operating ex- 
 penses, including depreciation and a reason- 
 able rate of interest upon the investment. 
 The amount by which the earnings fail to 
 meet these requirements may thus be re- 
 garded as deficits from the operation. These 
 deficits constitute the cost of building up 
 the business of the plant. They are as 
 much a part of the cost of building up the 
 business as loss of interest during the con- 
 struction of the plant is a part of the cost of 
 its construction. They are taken into account 
 by those who enter upon such undertakings, 
 and if they cannot be recovered in some 
 way the plant fails by that much to yield 
 reasonable returns upon the amount that 
 has been expended upon it and its business. 
 
28 
 
 Such deficits may be recovered either by 
 being regarded as a part of the investment 
 and included in the capital upon which in- 
 terest is allowed, or they ma}' be carried 
 until they can be written off when the earn- 
 ings have so grown as to leave a surplus 
 above a reasonable return on the investment 
 that is large enough to permit it. When 
 capitalized they become a permanent charge 
 on the consumers. When charged off from 
 the surplus they are gradually extinguished. 
 (These facts alone, however, do not always 
 furnish the best or most equitable basis for 
 the disposal of such deficits.) Whether 
 they should go into the capital account, 
 or whether they should be written off, as 
 indicated, are questions that largely depend 
 onthe circumstances in each particular case." 
 
 Some issues of preferred stocks are made 
 " cumulative" as to dividends; i. e., any failure 
 to pay the full rate of dividend on the cumulative 
 preferred stocks must be cared for before any 
 payments of dividends can be made to the holders 
 of the common stocks. 
 
 (d) BETTERMENTS, ADDITIONS AND EXTENSIONS 
 ORIGINALLY CHARGED TO INCOME, BUT 
 WHICH MIGHT HAVE BEEN CHARGED TO 
 CAPITAL, CAN PROPERLY BE CAPITALIZED. 
 
 Had the actual income so used been paid to 
 the stockholders as dividends, no question could 
 have been raised. If so paid and any or all of 
 
29 
 
 it subsequently reinvested, no one would question 
 the right to receive capital stock for the addi- 
 tional investment. See, also, answer to (c). 
 
 There can be no good reason for prohibiting 
 the direct accomplishment of that which by indi- 
 rect means can be done without wrong or injury 
 to anyone. 
 
 (e) THE MODE OF VALUATION OF PHYSICAL AND 
 NON-PHYSICAL PROPERTIES OF RAILROADS 
 IF VALUE IS MADE THE BASIS OF CAPITAL- 
 IZATION. 
 
 It is probable that not many have been 
 misled by the inappropriate and inaccurate 
 use of the word " value" in the application of the 
 term " physical valuation " by those who advo- 
 cate a national investigation of the replacement 
 cost (or inventory of physical property) of Amer- 
 ican railways. As " value" is a relation in 
 exchange, that is in commerce, there is no value 
 that is not commercial and it is both idle and con- 
 fusing to call " physical value" that which is plainly 
 and by avowed intendment different from com- 
 mercial value. As all economic value is value in 
 use, and as use is in no way controlled by orig- 
 inal cost or replacement cost, there can be no 
 fixed or even continuing or constant relation be- 
 tween either cost and the real value. The writer 
 must also assume that if it is ever held that cap- 
 italization must be adjusted to " value ", the latter 
 
30 
 
 term is used in its proper and only true sense when 
 indicating value in use. Hence when it is pro- 
 posed to ascertain replacement cost and also 
 value in use, and in connection with control of 
 capital issues, it must be intended to ascertain each 
 separately and independently, and having com- 
 pared the aggregate to correct the former by apply- 
 ing whatever proportionate or other allowance for 
 non-physical value may be found necessary to 
 make it agree precisely with the latter. -To this 
 manifest absurdity is the proposal for a so-called 
 " physical valuation" reduced by a rigid scrutiny 
 of its proposed methods and uses. 
 
 The obvious suggestion flowing from this con- 
 clusion is that as only value in use is wanted, as 
 that is the only real value, and as it must be 
 separately ascertained in any event, no other 
 and pseudo value need be taken. The essen- 
 tial character of the proposed method is as 
 has been described even when it is applied 
 through determination of the annual value of 
 the use and the assignment of one portion of 
 such annual value to return on the capital 
 value of the physical property and another portion 
 to return on the capital value of non-physical 
 property. The real nature of the method is not 
 even, effectually concealed by the capitalization 
 of the income assigned to physical property at one 
 rate and of the income assigned to non-physical 
 
property at a different and higher rate. In fact, 
 if it is necessary to conclude that a portion of the 
 net annual income of railway property is normally 
 paid to or in respect of a portion of capital entitled 
 to a lower rate of return and the balance to or in 
 respect of a remainder of capital entitled to a 
 higher rate, the appraisal of the physical prop- 
 erty is an excessively costly, cumbersome and 
 inaccurate expedient for determining the capital 
 value of either sort of property. Yet that is 
 exactly what was done in Michigan by Professor 
 Adams, Statistician to the Interstate Commerce 
 Commission, the "valuation" he then made 
 having been completed before he altered his view 
 by deciding that the non-physical elements of 
 value are entitled to no consideration whatever, 
 and that only cost of replacement is worthy of 
 inclusion in an official u valuation." 
 
 But is there any real distinction between the 
 " physical properties " and the " non-physical ele- 
 ments " such as seems to be assumed by some? 
 Is not the superficial appearance of such a dis- 
 tinction plausible but deceptive ? A locomotive 
 is an entity, so is a railway. The separate parts 
 of a locomotive are most of them independently 
 valuable, so are the separate parts of a railway. 
 But a large share of the value of the locomotive 
 is the result of the nice adjustment of these 
 separate parts to each other and to the work to 
 
32 
 
 be done. Take a hundred different sized loco- 
 motives, each adapted to different services under 
 different conditions, and separate each piece of 
 metal, it might be possible to value all of these 
 parts, but plainly the aggregate would be far less 
 than the value of the locomotives from which they 
 were taken. Again, it would be possible to con- 
 struct from these parts a hundred locomotives 
 of such poor design, their respective parts so out 
 of adjustment and balance that they would be 
 worth even less than the parts out of which they 
 were assembled. The highest paid intelligence 
 has not yet contrived the perfectly balanced loco- 
 motive, but a large part of the so-called " physi- 
 cal value " of every locomotive represents this 
 sort of highly paid intelligence put forth at every 
 stage from the opening of the mines where the 
 ore was obtained to the delivery of the completed 
 locomotive. Take ten railways of a thousand 
 miles each, every one of them efficiently con- 
 structed and equipped with proper terminals, 
 stations, signals, rolling stock, and trained em- 
 ployees, and property adapted to the requirements 
 of its territory and traffic ; separate them into 
 piles of ties and rails, groups of locomotives and 
 cars, acres of land, unorganized bodies of men of 
 varied capacity and training ; what sort of intel- 
 ligence will it require to build up, out of these 
 masses, ten railways as efficient and useful as 
 
33 
 
 those that originally existed ? Why then should 
 the "physical value" of the locomotive include 
 the assembling of its parts in proper balance, and 
 the " physical value" of the railway exclude the 
 cost of the much more complicated adjustment of 
 its elements of organization, machinery and labor 
 and location to each other ? 
 
 That which has been misnamed "physical 
 valuation " is nothing more nor less than the de- 
 termination of the "cost of material in place, 
 using materials of design, construction and con- 
 dition exactly similar to those at present in the 
 property ". 
 
 The writer has shown above that there neither 
 is nor can be any fixed relation between any two 
 of the three items : 
 
 (1) The cost of material in place (whether 
 
 for new or second-hand material), 
 
 (2) The par value of securities issued and 
 
 outstanding, and 
 
 (3) The present fair value of the property. 
 
 None of the advocates of a "physical valua- 
 tion " defined by some as "the cost of material 
 in place, less depreciation", have suggested 
 any reasonable plan whereby such amount when 
 determined can be used in arriving at the "fair 
 value" of the property. Unless such use can be 
 
34 
 
 made there would appear to be no justification 
 for the large expenditure involved in taking 
 such inventory. 
 
 Physical property has no value which is not an 
 expression of its adaptation to economic needs. 
 This is only another way of expressing the inev- 
 itable economic law, from which there is no 
 escape, either in theory or in practice, that has 
 been stated and sanctioned by the Supreme 
 Court of the United States, as follows : 
 
 "But the value of the property results from the use to 
 which it is put and varies with the profitableness of that use, 
 present and prospective, actual and anticipated. There is 
 no pecuniary value outside of that which results from such 
 use". C. C. C. & St. L. Ry. vs. Backus, 164 U. 5., 445. 
 
 It is not in the original cost of a railway, nor 
 in the condition in which maintained, but in the 
 extent to which it serves to effectuate the ex- 
 changes of the surplus products of individuals, 
 communities and nations that a railway has value. 
 The value of a railway lies, then, not in its 
 physical property, but in the use made, or that 
 can be made, of that property. The things that 
 secure a broad, extensive and profitable use are, 
 therefore, the things which give value to a 
 railway. 
 
 Some of the states have undertaken the de- 
 termination of the " cost of material in place." 
 None has perfected a plan for determining the 
 u fair value " of the property. The suggestions 
 
35 
 
 of the writer as to some additional* items to be 
 given consideration in connection with the " cost 
 of material in place " as well as his views as to 
 some of the items entering into the u fair value " 
 of the property are set forth in a paper prepared 
 by him for discussion by the Joint Session of 
 American Economic Association and American 
 Political Science Association at the Chamber of 
 Commerce, New York, December 30, 1909, a copy 
 of which is enclosed herewith. 
 
 To the items there enumerated there should be 
 added the value of leasehold rights, the control 
 of traffic originating on other lines either through 
 contract with such lines or through ownership of 
 a controlling interest in the stock. 
 
 One of the most important items to be con- 
 sidered is the " Cost of Progress " which is some- 
 times referred to as " abandoned property," or as 
 " obsolescence." For illustration, in the reduction 
 of the grade and revision of the line of a road 
 whereby the capacity of existing track is doubled, 
 the present instructions of the Interstate Com- 
 merce Commission require the charge to operating 
 expenses of the cost of that portion of the old line 
 no longer continued in use. If, however, the 
 doubling of the capacity of the line be secured by 
 the construction of a second main track, the 
 entire cost of the new work can be charged to 
 capital account and paid for from the proceeds of 
 
36 
 
 the sale of capital securities. The latter method 
 becomes the easier to finance, but what of the 
 comparative results? Say, for example, the orig- 
 inal cost of material of existing property, includ- 
 ing equipment, stations, yards, etc., was $10,- 
 000,000, that the first main track cost $1,000,000 
 and that to double the capacity of the main track 
 would require a present expenditure of $i ,000,000, 
 either for (i) a reduction of the grades and 
 curves of the first main track or (2) for the con- 
 struction of a second main track. The increase 
 in capacity is identical, but in the first case the 
 cost of train service to handle the tonnage is de- 
 creased 50 per cent, and some reduction in main- 
 tenance is secured, while in the second case no 
 economies of operation are effected, but the ex- 
 penses may be increased. Undoubtedly, road (i) 
 would be much more valuable than road (2), yet 
 the Commission says a portion of the cost of per- 
 fecting the road (i) must be charged to operating 
 expenses, and cannot be capitalized. What gen- 
 eral manager will dare recommend such exten- 
 sive improvements when the charging of a por- 
 tion of the cost to operating expenses will show 
 the dividend as unearned for a single year, and 
 thus render the securities of the company no 
 longer legal investments for savings banks, 
 trustees of trust funds, etc. ? As an alternative, 
 he might permit the old line to remain and, by 
 
37 
 
 placing thereon a few cars occasionally, could 
 consider it still in use and carry it in his capital 
 account, thus avoiding the charge to operating 
 expenses. Thus, again, it is the method and 
 not the result that is controlled by these in- 
 structions. What should be done is to permit 
 the cost to be charged against the surplus accu- 
 mulated during the years in which was used 
 the property to be abandoned. This would not 
 adversely affect the operating income of the year, 
 and would not impair the credit of the company. 
 Plainly, the instructions of the Commission 
 tend to compel a method that produces results 
 contrary to the economic law. 
 
 SECOND. 
 
 THERE COULD BE NO USEFULNESS COM- 
 MENSURATE WITH ITS COST IN AN OFFICIAL 
 DETERMINATION OF REPLACEMENT COST. 
 
 The writer has no concern, other than as a 
 tax-payer and as the officer of a tax-paying cor- 
 poration, in the question whether the Federal 
 Government should undertake an official valua- 
 tion of railway property. Fairly undertaken, 
 and under competent and unbiased auspices, such 
 a valuation could in no way impair any proper 
 railway interest. In view, however, of what has 
 already been said herein, it is unnecessary fur- 
 ther to present reasons for his opinions that such 
 an undertaking could benefit no one, and would 
 
38 
 
 entail an unnecessary and large expense which 
 the tax-paying public ought not to be compelled 
 to bear. The only reasonable suggestion sus- 
 taining the utility of such a valuation in 
 connection with rate-control is based upon the 
 possibility that the Courts may find it necessary, 
 in order to support proper standards by which 
 the reasonableness of rates may be tested, to 
 revert to the early legal doctrine that such rates 
 are separable into parts representing (a) tolls for 
 the use of the property or highway and (6) com- 
 pensation for the performance of a service on 
 such highway. This suggestion seems to merit 
 thoughtful consideration. 
 
 The United States Supreme Court has decided 
 that where Congress has granted lands to aid in 
 the construction of a railroad, with the provision 
 that "said railroad shall be and remain a public 
 highway for the use of the Government of the 
 United States, free from all toll or other charge, 
 for the transportation of any property or troops 
 of the United States, such provision secured to 
 the Government merely the free use of the rail- 
 road, and did not entitle the Government to have 
 troops or property transported over the railroad 
 by the Railroad Company itself free of charge 
 for such transportation." (Lake Superior & 
 Mississippi Rway. Co. v. United States, 93 U. S. 
 442). 
 
39 
 
 " In the case of Boyle v. Philadelphia and 
 Reading Railroad Company, 54 Penn. 310, 
 decided in 1867, the Supreme Court of 
 Pennsylvania held that the charter of the 
 latter company made the road a public high- 
 way, on which all persons might place 
 vehicles of transportation on conforming to 
 the regulations of the company ; and that in 
 limiting the amount of 'tolls' demandable 
 for transportation on the road, the legislature 
 had reference to 'tolls' charged to other 
 parties using the road, and not to the freights 
 or charges for transportation which the com- 
 pany itself was authorized to demand when 
 performing transportation." Lake Superior 
 & Mississippi Rway. Co. v. United States, 
 93 U. S. 448. 
 
 In other words, the owner of the turnpike is 
 entitled to not less than the legal interest upon 
 the value thereof; and at the same time, the 
 hackman taking passengers over the turnpike is 
 entitled to a reasonable reward for the services 
 rendered by him, and this reward will depend 
 upon efficiency, and that return is never limited to 
 the amount of his expenses plus a fair daily wage. 
 
 Does the situation change if one person both 
 owns the turnpike and operates cabs over it? It 
 does not, and there is no reason why it should. 
 
 The larger hotels are owned by individ- 
 uals or private corporations, and are leased to 
 the parties by whom they are operated. The 
 
4 o 
 
 owners receive rent in payment of use of the 
 property, while the manager receives pay for the 
 service rendered. 
 
 Another example is the canals. There are 
 some owned by individuals or private corpora- 
 tions who maintain the canal, charging others 
 for the use of the canal. Other people own the 
 boats and perform the service, receiving a reward 
 for service rendered. This same practice existed 
 on the railroad lines of The Delaware and Hud- 
 son Company when it was first built, the company 
 maintaining the railroad, making a charge for 
 the use of same and permitting others to operate 
 over the railroad, which parties received a profit 
 from their transaction to cover the service ren- 
 dered by them. 
 
 In like manner the carriers are entitled to a 
 return upon the value of the railroads to cover 
 the use thereof, and this rate of return will 
 increase with the risk incurred ; and they are 
 also entitled to a reward for the service rendered, 
 and this reward must increase with improved 
 service or with increased service. They are 
 entitled to earn for such service the ordinary 
 return of industrial corporations. 
 
 The following statement shows the book cost 
 of, and the return upon, that portion of the fixed 
 property of the carriers which is devoted to public 
 use: 
 
.2 
 
 o 
 
 sj U 
 
 ^ ^ O 
 cyOO 
 
 v < n 
 
 2s5 
 
 rA "^ ^ 
 
 3 a a 
 
 $t> 
 
 be 
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 M 
 
 G 
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 C/5 
 
 E-H > W O.M HI ITT 
 
 CU 3 r 1 O O, FH 
 
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 COCO ON O O ON ON O ON CO iO\O r^ ON ON -" ^^O *^ 
 
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 lOM 
 
 J^ co tooo" 1000" M" ON ON T? ri TTOO" M" to T? 0*00" M~ uS 
 " toovi^M cotocN r^toM r^o CN r^oo t^oo r^. to 
 
 O CO CN O TJ- IOVO ON M cs Tj-vO OOOCNI^MlOOO 
 ^ ^OO" 00* oo'oo" Oo'oo" ON ON O^> ON ON O" o" o" M" M" <s" cs" 
 
 IS 
 
 03 O 
 
 II 
 
 1 
 if 
 
42 
 
 As the return for use of property is less than the 
 minimum legal rate of interest, it can be said that 
 there has been no reward for the service rendered. 
 
 While some few individual rates may need 
 changing, these particular rates should be propor- 
 tioned to other rates at present in effect on other 
 traffic. Generally speaking, however, there can- 
 not be sustained any charge of unreasonableness 
 in the general rate schedules unless and until a 
 reward for service is made to the carrier. As 
 this has not been done, it seems unnecessary to 
 now incur a large expenditure for a valuation, 
 when the "value" is constantly changing, and 
 when many years must necessarily elapse be- 
 fore the earnings of the railroads will not only 
 earn the six per cent, to cover "use" of property 
 but in addition thereto will earn a reasonable 
 reward for "service rendered". 
 
 THIRD. 
 
 THE ADVISABILITY OF FEDERAL REGU- 
 LATION OF RAILROAD SECURITIES ; THE EX- 
 TENT AND METHOD OF SUCH REGULATION 
 IF IT IS DEEMED ADVISABLE ; THE ADVISA- 
 BILITY OF FEDERAL REGULATION FIRST, IF 
 IT EXCLUDES SIMILAR STATE REGULATION, 
 OR, SECOND, IF IT IS FOUND NOT TO EX- 
 CLUDE SUCH STATE REGULATION; AND THE 
 LEGALITY OF SUCH REGULATION. 
 
 Those who favor statutory restrictions and 
 official control of the security issues of railways 
 
43 
 
 have suggested but two objects to be attained 
 thereby, namely, (a) the protection of railway 
 patrons against excessive charges and inferior 
 service, and (b) the protection of investors against 
 fraud. These are both legitimate purposes, wor- 
 thy of the efforts of the best government and the 
 most accomplished statesmen, but as to either it 
 is proper to inquire (first) whether the desired end 
 can be obtained or promoted by the means pro- 
 posed, (second) whether a better means is avail- 
 able, and (third) whether the evils to be cured 
 would not be exceeded by new evils brought 
 about by the application of the proposed remedy. 
 These inquiries are suggested, their propriety is 
 self-evident. 
 
 CAPITALIZATION HAS NO DIRECT INFLUENCE 
 UPON RAILWAY CHARGES OR SERVICE. 
 
 The suggestion that a superabundant issue of 
 capital securities would lead to higher charges for 
 railway services might seem to be of more practical 
 importance if there were any real and general 
 over-capitalization of American railway property. 
 But, as has been proven over and over again, the 
 contrary is the fact on the whole the value of the 
 railway system of the country is actually and 
 greatly in excess of the par value of all the 
 securities outstanding. Examining the sugges- 
 tion as it stands, however, it plainly involves the 
 
44 
 
 assertion that charges can be advanced at will and 
 that the desire to earn a return upon all out- 
 standing securities is a sufficient incentive to such 
 advances. But between the desire for more 
 revenue and its satisfaction by means of advanc- 
 ing rates to unreasonable figures or the substitu- 
 tion of inferior service stands, (first) the regula- 
 tive power and established agencies of the federal 
 and state governments, and (second) the fact that 
 the commodities moved must be sold in competi- 
 tive markets where they meet the same and 
 substitutable articles produced locally and brought 
 from other sources of supply, and that, in conse- 
 quence, exorbitant rates or inferior service will 
 invariably produce less and not more net income. 
 Supplying warehouse and elevator facilities 
 is an industry affected with a " public interest", 
 in the legal sense, of precisely the same character 
 as that attaching to railway property and public 
 regulation of warehouse and elevator charges 
 rests upon precisely the same legal and economic 
 foundation as public control of railway rates 
 or services. Has it ever been suggested that 
 by putting an additional mortgage upon an ele- 
 vator property the proprietors could place them- 
 selves in a position to obtain higher rates for 
 their services? On the contrary, it is well known 
 that the necessity of earning interest or passing 
 into bankruptcy, to say nothing of a desire to 
 
45 
 
 earn dividends, tends to stimulate competition 
 with the normal result of tending strongly to 
 reductions in rates unduly high as a means of 
 obtaining more business and more revenue. 
 Rates properly adjusted to the commercial re- 
 quirements of the persons, communities and in- 
 dustries served by a railway and accompanied by 
 proper economies of management determine value 
 in use, they cannot be the consequence of meth- 
 ods of financing in any direct manner or to any 
 tangible degree. 
 
 On the other hand, if improper statutory re- 
 strictions should be so laid upon the issue of 
 railway securities as to retard the inflow of 
 capital necessary to defray the cost of improve- 
 ments tending toward lower operating cost or 
 to provide for extensions demanded by the 
 growth of industry, these restrictions would 
 tend inevitably to raise the rate of return de- 
 manded by capital and to postpone economies. 
 Both of these undesirable results would un- 
 doubtedly follow from such unwise legislation. 
 And, as it is an invariable law of the railway 
 industry that the larger share of any economy 
 in operation accrues to the railway patrons in 
 the form of reduced charges for services, the 
 indirect consequence of injurious restrictions 
 would be higher rates than those which would 
 otherwise be charged. 
 
4 6 
 
 Public utterances of federal and state officers, 
 as well as articles in the daily press and in 
 monthly and other periodicals, would indicate 
 that there is a widespread opinion to the effect 
 that the securities of railways have been watered 
 and that this condition is general. There is, 
 therefore, shown below an analysis of the con- 
 solidated balance sheet of all the railroads of the 
 United States as shown in the report of the Com- 
 mission for 1908 and 1890: 
 
I* 
 
 W) 
 
 i 
 i 
 
 2 
 
 f- 
 
 3 
 
 1 
 
 c/3 
 
 1 
 
 5 
 
 1 
 
 3 
 
 3>~ 
 
 sti 
 
 M U 
 
 li? = 
 
 ! 
 
 OO VO 
 
 COCO 
 
 1010 
 
 
 
 1 
 
 ?^ 
 
 
 
 a 
 
 PI 
 
 oo 
 
 ftft 
 
 !o?*T 
 
 O\>O 
 
 
 1 
 
 i 
 
 S.S 
 
 I 
 
 - 
 1 
 
 If 
 
 = a 
 
 ^o 
 w a 
 
 35 
 N 
 
 fl fc 3 
 
 3 5 
 DOC 
 
 ^ 
 
 III 
 
 .B 
 
 as --g-o- gg ^ g^ gg^ 
 
 Ifl^ ss|s Sgl i sj, ^g i <^2 s 
 2M|l S ilM3l! S5 3 H?33l 
 
 o o o C H E S w P * rt .5 , ^3 *" fcI5 , z a u, o * 
 
 ^ii itrun 
 
 M a Ct/2 o S 
 
 l 
 
 "rt^S 
 
 3* 
 
 n 
 
 I! 
 
 f^tn 
 
4 8 
 
 The following statement shows the length in 
 miles of main and other tracks (See note) : 
 
 Track. 
 
 1908. 
 
 1890. 
 
 Increase. 
 
 Per Cent, 
 of 
 Increase. 
 
 Single Track 
 
 213,888.36 
 
 142,665.89 
 
 71 222 47 
 
 4Q Q 
 
 Second Track 
 
 20,209.05 
 
 8,437.65 
 
 II.77I.4O 
 
 I7Q C 
 
 Third Track 
 
 2,081.16 
 
 760.88 
 
 1,320 28 
 
 17-3 c 
 
 Fourth Track 
 
 1,408.99 
 
 56r.8r 
 
 847.18 
 
 ISO 8 
 
 
 
 
 
 
 Total, all main tracks 
 Yard track and sidings 
 
 237,587.56 
 73,728.57 
 
 152,426.23 
 30,750.17 
 
 85,l6l.33 
 42,978.40 
 
 55-9 
 139-8 
 
 Total mileage oper- 
 ated (all tracks)... 
 
 311.316.13 
 
 183,176.40 
 
 128,139.73 
 
 69.9 
 
 NOTE : The Interstate Commerce Commission in 1908 report that their 
 Balance Sheet covers "miles of road" aggregating 213,888.36 miles, whereas 
 their statement of mileage represents all roads reporting to the Commission 
 whether or not they furnished a Balance Sheet. 
 
 To analyze the Consolidated Balance Sheet, we have revised the state- 
 ment of mileage to cover same roads as are included in the General Balance 
 Sheet. The "miles of road," /. <?., miles of first main track are actual. The 
 Commission's report not showing separately for each line the miles of other 
 main tracks or yard tracks and sidings, the figures shown in the statement 
 of mileage are approximate. It includes mileage of all second, third and 
 fourth tracks. Undoubtedly practically all of the second tracks, third tracks 
 and fourth tracks are owned, or operated, by roads furnishing the Com- 
 mission with a Balance Sheet. Mileage of Yard Tracks and Sidings is based 
 on the proportion which the single track mileage of roads represented in the 
 Balance Sheet bear to the total single track mileage of roads reporting to the 
 Commission. 
 
 The Commission, in its annual report, shows 
 the securities issued per mile of road (first main 
 track) but does not show the results per mile of 
 main track, (t. e., ist main track, 2nd, 3rd, 4th 
 and other main tracks), nor does it show the 
 results per mile of all tracks, (z. e., main tracks, 
 yard tracks, passing tracks and industrial tracks). 
 From the Consolidated Balance Sheet it will be 
 noted that the securities per mile of road have 
 increased 29 per cent., while per mile of main 
 track they have increased only 24 per cent, and 
 
49 
 
 per mile of all tracks they have increased but 14 
 per cent. However, deducting the investments 
 in stocks and bonds of other corporations and 
 showing the results only for the securities issued 
 account of the cost of road and equipment, we 
 have an average per mile of road of $62,388, an 
 increase of 12 per cent. ; and an average per 
 mile of all main tracks of $56,166, an increase of 
 8 per cent. ; and an average per mile of all tracks 
 of $42,864, or a decrease of iV of i per cent. 
 It will be noted that a considerable part of these 
 increases is due to increased cost of equipment 
 and the advantageous results obtained from that 
 investment are clearly shown below. Of the 
 investment in the track itself (cost of road) it 
 will be noted that the cost per mile of main 
 track has increased only 5 per cent, while the 
 cost per mile of all tracks shows a slight decrease 
 in 1908 as compared with 1890. 
 
 Moreover, the result is surprising when con- 
 sidering the large expenditures since 1890 for 
 reduction of grades, revision of line, interlocking 
 towers, automatic block signals, increased weight 
 of rail, increased capacity of bridges, improved 
 stations and terminals, elevation of tracks and 
 the many other items classified as Additions and 
 Betterments and increasing the aggregate cost of 
 material in place. A very considerable portion 
 of these improvements has been charged to Income 
 
Account or to Profit and Loss Account, and is 
 not included in the u Book Cost of the Property/' 
 and no capital securities were issued on account 
 of same. The charges to capital account during 
 the past twenty years at least can be said to have 
 been conservative. 
 
 The following statement shows the relation of 
 the Book Cost of Railways to the traffic handled, 
 and clearly indicates the increasing efficiency of 
 the railways and the reduction in the unit charge 
 to the public : 
 
 
 
 
 Change, 
 
 Per Cent. 
 
 
 
 1090. 
 
 Increase. 
 
 Decrease. 
 
 (Book) Cost of Railways and 
 Equipment (including Ma- 
 
 
 7 8iq 177 T.T.I 
 
 71 80 
 
 
 
 
 
 
 
 
 2l8 ^8l SS4- 8O2 
 
 
 18656 
 
 
 Passenger Miles 
 
 29.082,836,944 
 
 11,847.785,617 
 
 14547 
 
 
 
 Total Traffic Units 
 
 247,464.391,746 
 
 88,054,832,915 
 
 181.03 
 
 - 
 
 Capital Cost per Unit of Traffic 
 
 5.43 cents. 
 
 8.88 cents 
 
 - 
 
 38.85 
 
 Charge to Public Per Unit of 
 Traffic 
 
 9.0 mills 
 
 i. ii cents 
 
 
 18.92 
 
 
 
 
 
 
 From the printed reports of the Interstate Com- 
 merce Commission it will be seen that, although 
 there has been some increase in the average re- 
 turns to the investor, there yet remains consider- 
 able risk in connection with investments in 
 steam railways. Further, the increase in rates 
 of pay of employees in 1908 over 1892 ranged 
 from 5.9 per cent, to 37.5 per cent (average in- 
 crease 19.1 per cent.). The increases in pay 
 
granted to employees during the year 1910 will 
 range from 8 per cent, to 10 per cent, over the 
 rates in effect in 1908. 
 
 Notwithstanding an increase in returns to the 
 investor, the very large increase in the average 
 rates of employees and an increase in amount of 
 other items entering into the cost of operation, 
 the shipper has paid to the railways at least 19.87 
 per cent, less per revenue ton mile than was paid 
 in 1890. These results have been obtained princi- 
 pally in three ways : 
 
 First. A reduction in the grades, the cost of 
 which necessarily added to the average cost per 
 mile of track. 
 
 Second. Increased investment in equipment: 
 
 
 1908. 
 
 1890. 
 
 Increase. 
 
 Per Cent. 
 
 Total locomotives 
 
 S7,6o8 
 
 30,140 
 
 27,558 
 
 91.4 
 
 Total passenger cars 
 Total rev. freight cars.... 
 
 45.292 
 2,100,784 
 
 26,820 
 918,491 
 
 18,472 
 1,182,293 
 
 68. 9 
 128.7 
 
 As the miles of main track increased only 
 49.9 per cent, it will be seen that, necessarily, 
 the investment u per mile of track" on account 
 of locomotives, passenger cars and freight cars 
 has very materially increased. 
 
 The roadbed has been strengthened by use of 
 heavier rail, and by the substitution of iron and 
 steel for wooden bridges, etc., and terminal facili- 
 ties have been enlarged and improved. 
 
52 
 
 Third. The aggregate capacity of all equip- 
 ment has increased much greater than the 
 increase in number of locomotives and cars. 
 The reports only show this information for the 
 years 1902 to 1908, both inclusive. The average 
 tractive power of locomotives in 1908 was 26,356 
 pounds, as compared with 20,485 pounds in 1902, 
 being an increase of 5,871 pounds, or 28.7 per 
 cent, per locomotive. The average capacity of 
 freight cars in 1908 was 35 tons, as compared 
 with 28 tons in 1902, an increase of 7 tons, or 25 
 per cent. Undoubtedly, the average capacity 
 of locomotives and the average capacity of freight 
 cars in 1908 was not less than 60 per cent, above 
 the average capacity of 1890. 
 
 The only data for the period prior to 1902 
 appears to be that included in a report by Mr. 
 L. F. Loree, as Reporter (for United States) to 
 the International Railway Congress held in Paris 
 in 1900, who communicated with all roads in the 
 United States then operating 500 miles of line, 
 or over, relative to the capacity of cars actually 
 in service. The result is shown in the following 
 statement : 
 
53 
 
 -fcg 
 
 - S 
 
 
 >> V ui 
 
 81 
 
 l 
 
 r 
 
 SSI 
 
 op 
 
 PJ CM O P) 
 
 E? $ pi ?i 
 
 83 
 
 t<r>. 
 
 447 
 447, 
 
 00 S 
 
 SI 
 
 H4- 
 255, 
 
 C7SCM 
 
 
 5,8 
 
 w ro 
 
 120, 
 245, 
 
 00 col PI t^. 
 
 OM 
 
 88 
 
 fao 
 
 1588 
 
 T3 
 
 a o 
 
 s'S 
 
 
 v*l"i -fa 
 
 ? w v o o 5 
 
 |g^35g*3 
 
 S Is <i M d a o % li 
 
 TJ M 
 
 ?^i? 
 
 I s 
 
 *j ; a 
 'O 'H a 
 1 S o h 
 
54 
 
 As a result of these improvements in roadway 
 and equipment, the average number of tons of 
 freight handled per freight train in 1908 was 
 351.80 tons as compared with 296.47 tons in 
 1902, an increase of 55.33 tons, or 18.6 per cent. 
 
 The average tons per freight train in 1908 
 was 351.80 tons as compared with 175.12 in 
 1890, an increase of 176.68 tons, or 100.8 per 
 cent. 
 
 If the figures prove any one thing, it is that 
 there has been no general practice on the part 
 of the roads of the country, from 1890 to date, of 
 issuing capital securities without securing full 
 value for the vast amount referred to. They 
 certainly do not afford ground upon which can 
 be based an argument for government super- 
 vision of the issuance of securities. 
 
 INVESTORS SHOULD BE PROTECTED AGAINST 
 FRAUD. 
 
 Fraudulent representations in the issue or 
 sale of railway securities may not only deprive 
 unwary investors of accumulated savings but 
 they tend to destroy confidence in such invest- 
 ments in general and to retard the normal devel- 
 opment of the industry. Happily such misde- 
 meanors are matters of history rather than of 
 recent occurrence. With the railroads, the 
 government, through its system of accounts, now 
 
55 
 
 regulates the items entering into the capitaliza- 
 tion of the railways, and it ought not to under- 
 take to have each of them approved by a com- 
 mission before being capitalized. But if this 
 danger can be regarded as in any way threat- 
 ening it is submitted that laws for the punish- 
 ment of the guilty, not laws for the repression 
 of innocent and guilty alike, constitute the 
 indicated remedy. No one will object to the 
 most drastic laws of this sort that can be 
 contrived and all of the properly-minded will 
 favor their rigorous enforcement. In other words, 
 the government should " regulate" and not 
 "control" the issues. 
 
 For illustration : By means of statutory pro- 
 visions, the government regulates the class of 
 securities that can be purchased by insurance 
 companies, savings banks, and trustees of trust 
 funds. No commission is appointed to specifi- 
 cally pass upon each security purchased, either 
 prior or subsequent to the purchase. 
 
 In a previous paragraph, we have shown the 
 control now resting with the present stockholders. 
 
 As to the price to be paid by new investors in 
 the securities of the Company, is a question of 
 exchange between a buyer and a seller. Whether 
 or not the purchase be profitable to the new buyer, 
 will depend upon the "present value" of the 
 property, and not upon the aggregate par value 
 
56 
 
 of securities outstanding. We have stated be- 
 fore that the property may be worth more to one 
 person than to another. 
 
 In this connection, suppose the present security 
 holders wish to issue additional stock to other 
 parties, at, say, $150 per share having a par 
 value of $100, but a supervising commission 
 should say the price must be $125 per share. 
 The present stockholders could then subscribe 
 pro rata for the new stock at $125 per share, 
 and subsequently sell it in the market at $150 
 per share. In other words, to protect the in- 
 vestor would involve more than the price at 
 which the Company issues the security; it would 
 necessitate supervision over private sales of stocks 
 and over the security markets. 
 
 To the extent that the new investor would be 
 guided by the Commission's price on the securi- 
 ties, the investor can be protected by the reports 
 now filed with the Commission. 
 
 In any event the most serious risk accepted by 
 the purchaser of railway securities, which is but 
 another aspect of the responsibility which he 
 ought to and must bear, that of obtaining or 
 failing to obtain properly efficient management, 
 cannot adequately be covered by any act of any 
 legislative body, National or State. 
 
57 
 
 EXISTING LAWS PREVENT FUTURE OVER- 
 CAPITALIZATION. 
 
 Whatever capital securities are now outstand- 
 ing on account -of any rail way property represent 
 rights of legal or equitable ownership which are 
 protected by Constitutional guarantees and could 
 not be impaired even in the unthinkable event 
 that such impairment should be favored by the 
 majority of any legislative body. Future issues 
 must be controlled, as has already been indicated 
 herein, by the necessities of the public served by 
 the carriers and of the carriers themselves, by 
 the conditions of investment markets, and by 
 the requirements of the accounting methods en- 
 forced under authority of law by the Interstate 
 Commerce Commission and the Railroad Com- 
 missions of the several States. The Interstate 
 Commerce Commission now closely supervises 
 the accounts of all interstate railways, and they 
 require monthly, annual and periodical state- 
 ments, thus assuring the utmost publicity. 
 Prosecutions are likely to result should any 
 illegal act be committed ; while the attitude of 
 the investing public, when fully informed, will 
 make it wholly impossible to hereafter issue 
 capital securities beyond those which properly 
 cover charges of this character. It is submitted 
 that this control or regulation of capitalization is 
 effectual and sufficient. 
 
58 
 
 FEDERAL CONTROL PREFERRED TO THE SEP- 
 ARATE CONTROL OF FORTY-SIX STATES. 
 
 The life and powers of a corporation as limited 
 by its charter are co-extensive with the territorial 
 boundaries of its creators somewhat increased by 
 the comity of the States but its range of action 
 even under that charter is limited by the jurisdic- 
 tion of its creator over those actions. 
 
 The writer will not attempt to discuss the 
 question whether in the admitted absence of any 
 possible effect upon rates the Federal govern- 
 ment is entrusted with power, under the Com- 
 merce clause of the Constitution or otherwise, 
 to legislate with reference to the capital issues 
 of interstate railways. However, should the 
 activities of the government be confined to a 
 ''regulation" and not to a ''control" of the issue 
 of new securities, and exceptions to the general 
 rule are permitted only when first approved by a 
 Commission appointed for that purpose, the mat- 
 ter could be handled with greater despatch and 
 more intelligently by the several states than by 
 the federal government, as the state commissions 
 would be in a better position to pass upon the 
 necessity of making exceptions. In this case, it 
 would be especially important that the statutory 
 requirements of the several states be made uni- 
 form and that the carrier be required to secure 
 the approval only of the commission appointed 
 
59 
 
 by the state granting the charter to the carrier 
 corporation. Otherwise, whether such legisla- 
 tion is or is not constitutional, it is plain that if 
 legislation is to be adopted, the desirability of uni- 
 form rules and the certainty of conflicts of au- 
 thority under any other system, tend strongly to 
 support the conclusion that a regulation plan of 
 national scope is to be preferred. Recent episodes 
 connected with efforts to apply State supervision 
 plainly show that at present the separate author- 
 ity of each of the forty-six States, or so many of 
 them as may be traversed by the lines of a par- 
 ticular company cannot be invoked in this behalf 
 without conflict, confusion and economic loss. It 
 seems essential that one authority should have 
 sole jurisdiction, and that this should be brought 
 about either by an arrangement between the 
 states, or by the assertion of exclusive jurisdic- 
 tion by the federal government. 
 
 THE DUTIES OF BOARDS OF DIRECTORS OUGHT 
 
 NOT TO BE DELEGATED TO A COMMISSION, 
 
 SEMI-POLITICAL OR OTHERWISE. 
 
 Another consideration seems now of vital 
 importance. The labors imposed upon many 
 of the public agencies established during the 
 past twenty years for the enforcement and ad- 
 ministration of regulative laws applicable to 
 carriers and other public service industries seem 
 to exceed practicable limits. 
 
6o 
 
 The Interstate Commerce Commission have 
 advocated a valuation of all of the railways, and 
 have requested Congress to place with the Com- 
 mission control over the issue of capital securities, 
 but they have not suggested a method for 
 determining the value, and they have not dem- 
 onstrated the necessity for either a valuation or 
 for federal control over the issue of capital 
 securities. 
 
 The Commission claim they now have control 
 of the capitalization of the railways, through 
 their system of accounts. The system of operat- 
 ing accounts promulgated by the Commission 
 have been in effect since July i, 1907, or about 
 three and one-half years. Therefore, it would 
 be well to ascertain the effect of the accounts 
 promulgated by the Commission to determine 
 whether they protect the investors in railway 
 securities as well as the public ; and whether 
 additional security could be had either by a 
 valuation of all of the railways or by federal 
 control of the issue of capital securities, or 
 whether this can be more effectually accomp- 
 lished in some other way. 
 
 Some of the rules included in the system of 
 accounts will, during the next few years, be 
 proven to exert a greater effect detrimental to 
 the continued development of the railways than 
 has depended upon any question previously 
 
6i 
 
 considered by the Commission, -or than would 
 be caused by an adverse decision in the 
 important rate cases now pending. 
 
 The principles advocated by the Commission 
 are not new, but are largely those which have 
 been followed in former years by railways com- 
 monly referred to as strongly established and 
 conservatively managed. However, it was not 
 then, nor is it now, prudent or possible for the 
 weaker roads to adopt the same financial policy as 
 is followed by the stronger roads. Doing so would 
 undoubtedly either throw the weaker companies 
 into bankruptcy or seriously impair their credit. 
 
 For illustration : A road that has but slight 
 margin over and above its fixed charges and 
 four per cent, on its stock may find it necessary 
 to reduce its grades and make other extensive 
 improvements to increase the capacity of the 
 line. .While the change may double the capacity 
 of the track, some time must elapse before the 
 traffic is doubled. Therefore, while the manage- 
 ment might be justified in increasing its fixed 
 charges to the extent of the interest on bonds 
 issued to pay for these improvements, it prob- 
 ably would not find it possible, as required by the 
 rules of the Commission, to charge to operating 
 expenses fifty or sixty per cent, of the cost of the 
 new construction, as making this large charge 
 to operating expenses would correspondingly 
 
62 
 
 reduce the income available for fixed charges and 
 dividends. The result would be that the dividend 
 of four per cent, would neither be earned nor paid 
 and the securities of the Company would no longer 
 be legal as investments for insurance companies, 
 trust funds or savings banks. This would not 
 only seriously affect the ability of the company 
 to market its new securities but it would also 
 seriously impair its credit, in New York State for 
 not less than five years and in Massachusetts for 
 not less than ten years. 
 
 Some of the State Commissions have had 
 supervision over the issue of new securities. 
 They have found it neither desirable nor possible 
 to lay down hard and fast rules to be adhered to 
 alike by all railroads ; but they have found that 
 the causes for increasing the capital securities, 
 the kind or class of securities to be issued, and 
 the prices at which they are to be sold, vary, and 
 necessarily so. Are the Commissioners in a 
 better position than the several Boards of Direc- 
 tors to pass judgment upon all the factors enter- 
 ing into the price of securities ? It must be borne 
 in mind that the members of the Boards of 
 Directors are in close touch with the properties 
 and that generally they are men who are fully 
 acquainted with the many factors affecting the 
 relative prices of securities, as well as those affect- 
 ing the general market for securities of all classes. 
 
63 
 
 Also the recent settlement of suits brought 
 against the directors of certain national banks of 
 New York City, indicates that the liability of the 
 directors of a corporation are too great to justify 
 the assumption that they are likely to knowingly 
 commit a wrongful act or neglect to perform the 
 duties of their office and especially is this true 
 of the railroads engaged in interstate commerce, 
 members of the Boards of which are usually men 
 of high standing. Is it likely under these cir- 
 cumstances that the judgment of a semi-political 
 commission will be better than that of the Board 
 of Directors? 
 
 In this connection, consideration must be given 
 to the probable effect on the credit of the corpora- 
 tion of a failure to sell the securities, due to the 
 price fixed by the Commission being too high or 
 the terms too onerous ; also to the loss likely to 
 be sustained through delays on the part of the 
 Commission preventing the sale of the securities 
 until there have been substantial reductions in 
 the market prices of all securities. 
 
 The great importance of this question is best 
 understood by those familiar with the amount 
 of new securities issued each year, and in this 
 connection there is submitted the following 
 data taken from the Annual Reports of the 
 Commission, showing the railroad securities out- 
 standing on June 3oth, for the ten years 1899 
 
6 4 
 
 to 1908 both inclusive, and the increase therein 
 during the year : 
 
 Year. 
 
 Stock. 
 
 Bonds. 
 
 Total. 
 
 Increase 
 during Year. 
 
 1899... 
 1900... 
 1901... 
 1902... 
 1903- 
 
 $5,5T5.oil,726 
 
 5.845.579 593 
 5,806,566,204 
 6,024,201,295 
 6,155,559,032 
 
 $5,518,943,172 
 5,645.455,367 
 5,881,580,887 
 6,109,981.669 
 6,444,431,226 
 
 * 
 
 $11,033,954.898 
 11,491.034.960 
 11,688,147,091 
 12,134,182,964 
 12,599,990.258 
 
 1215.400867 
 457.080 062 
 197.112.131 
 446,035,873 
 465,807,294 
 
 Average 
 
 $5,869,383,570 
 
 $5,920,078,464 
 
 $11,789,462,034 
 
 $356,287,245 
 
 1904.. 
 1905.. 
 1906.. 
 1907.. 
 1908... 
 
 $6,339.899,329 
 6,554.557,051 
 6803.760,093 
 7.356.861,691 
 7,373,212,323 
 
 $6,873,225,350 
 7 250,701,070 
 7,766661,385 
 8,725,284,992 
 9,394,332,504 
 
 $13,213,124,679 
 13-805, 258,121 
 14.570,421,478 
 16,082.146,683 
 16,767,544,827 
 
 $6r3, 134,421 
 592,133,442 
 765.163,357 
 1.511,725 205 
 685,398,144 
 
 Average 
 
 $6,885,658,097 
 
 $8,002,041,060 
 
 $14,887,699,157 
 
 $833,510,914 
 
 * 1898110,818,554,031. 
 
 Trusting that some of the thoughts outlined 
 above may be useful to your honorable Commis- 
 sion, and thanking you for the opportunity to 
 present the same, believe me 
 
 Very truly yours, 
 
 W. H. WILLIAMS. 
 
 Enclosures : 
 
 "Valuation of Public Service Corporations," 
 by W. H. WILLIAMS. 
 
 " Freight Rates," 
 
 by C. S. SIMS and W. H. WILLIAMS. 
 
 C9378A] 
 
M252IJ59 
 
 THE UNIVERSITY OF CALIFORNIA LIBRARY 
 
M252359 
 
 
 THE UNIVERSITY OF CALIFORNIA LIBRARY